Applied Research Bulletin - Volume 2, Number 2 (Summer-Fall 1996) - January 1996

Tallying the Economic and Social Costs of Unemployment

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Unemployment costs Canada — economically and socially. After reviewing the economic literature, Marcel Bédard of the Applied Research Branch has provided estimates of the economic and social toll of unemployment.

Unemployment represents a loss of revenue for society. Bringing unused human resources back to work produces goods and services that allow the unemployed to earn a salary, firms to make profits, all levels of government to collect taxes, and those already employed to increase their hours of work. It is commonly perceived that the total cost of unemployment equals lost revenue from unproduced goods and services. However, this is but a fraction of society's loss.

The social costs of unemployment must be added in order to obtain a comprehensive measure of the costs of unemployment. The social problems which generate psychological costs as well as costs related to health care, protection against crime, social tensions, human resources losses — to name a few — must be recognized.

Economic Costs Associated with Unemployment

Canada's economy suffers losses in production because of unemployment and, as a result, does not reach its potential level of production. If full employment could be reached, it is estimated that production could be significantly increased. For example, the ARB analysis points out that the 1994 total production loss associated with cyclical and structural unemployment was estimated by various studies to range from 3.8 to 10.2 percent of the gross domestic product of $748 billion. That adds up to a loss of $29 to $77 billion.

Unemployment and Government Budget Costs

Governments, like other economic agents, share a portion of the economic costs created by unemployment. Governments raise revenues from production in the form of taxes. Those taxes are then redistributed, via various economic agents, in the form of transfers and subsidies. Governments suffer revenue losses and increased expenditures because of unemployment. For all governments, the budget costs of Canada's unemployment rate of 10.4 percent in 1994 compared to — let's say — an unemployment rate of 8.5 percent might range from $8 to $12 billion. For the federal government alone, the budget costs might range from $5 to $6 billion. This means that if the economy in 1994 had operated at its potential level, the federal deficit could have ranged from $22.5 to $23.5 billion, instead of $28.5 billion.

The Social Costs of Unemployment

The ARB analysis reviews several studies with different approaches to better understand the impact that unemployment may have on people's physical and mental health and to determine the social costs it entails for individuals and society. Some of the studies seek to assess the psychological impact of unemployment. Others attempt to determine the effects of unemployment-related stress or shock on the incidence of various illnesses or on mortality. These two types of studies are generally based on assessments conducted among laid-off unemployed workers or studies of the unemployed. They show that the unemployed visit doctors much more frequently than workers and are more often admitted to hospital. These studies, however, are not able to establish a systematic relationship between the incidence of use of hospital services and an increase in unemployment.

Studies conducted by Dr. M. Harvey Brenner in the United States, however, are among the few that establish a direct link between unemployment and social pathologies. In the research he conducted for the U.S. Congress in 1984, Brenner estimated the direct relationship between the increase in the U.S. unemployment rate and the occurrence of several social pathologies, including the mortality rate, cardio-vascular or cirrhoses deaths, the homicide and suicide rates, admissions to psychiatric hospitals and arrests and incarcerations. For example, Brenner estimates that a 10 percent increase in the unemployment rate would have the direct effect of increasing the mortality rate by 1.2 percent, the suicide rate by 0.7 percent, and the rate of incarcerations by six percent. Serious studies like Brenner's indicate that social problems are attributable to unemployment.

Estimates of Direct Effects of 10% Increase in Unemployment Rate on Incidence of Social Pathologies in the United States:
Results of Brenner Study, 1984

Mortality	1.2%
Mortality attributable to cardio-vascular diseases	1.7%
Mortality attributable to cirrhoses	1.3%
Homicide rate *	1.9%
Suicide rate	0.7%
Admissions to psychiatric hospitals	4.2%
Incarcerations *	6.0%
Arrests	4.0%

* Increases in the rates for homicides and imprisonments are related to an increase in the unemployment rate for young men (18-24 years old),expressed as a percentage of the total unemployment rate.

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Tallying these costs, the ARB analysis makes clear that it is not enough to look at economic costs in isolation. The toll that unemployment extracts from Canada must be looked at as the sum of the economic and social costs it creates.

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